ch10.doc-Wiley.docVIP

CHAPTER 10 Activity-Based Costing and Management Learning Objectives After studying this chapter, you will be able to:. Understand the elements of an activity-based costing (ABC) system. Argue the decision usefulness of ABC systems. Explain the importance of activity-based management (ABM) in planning products, customers, and resources. Overview In Chapter 9, we examined how cost allocations facilitate long-term decisions by estimating each product’s share of capacity costs. In this chapter, we take a closer look at the use of cost allocations for long-term decisions. We discuss how activity-based costing (ABC) could improve these estimates and thus provide a better picture of long-term product profitability. We begin this chapter by reviewing the concept of a profit margin, which is important in making long-term decisions. We then describe the steps associated with designing product-costing systems and develop an activity-based costing (ABC) system for MKC. We conclude by illustrating how to use the data from ABC systems for product planning, customer profitability analysis, and targeting process improvements. Learning Objective 1 Understand the elements of an activity-based costing (ABC) system. Elements of Activity-Based Costing (ABC) Systems Exhibit 10.1 presents MKC’s income statement for the most recent year of operations. MKC prepares this gross margin statement after allocating fixed manufacturing costs to products in proportion to their actual labor cost. Consistent with GAAP, MKC expenses all sales, marketing, and administrative costs in the period incurred. Profit margin, which equals a product’s contribution margin less the cost of capacity resources needed to support its production, is the appropriate measure for evaluating long-term profitability. Firms use cost allocations as a practical way to estimate the cost of capacity resources that they assign to each product when measuring the profit margin. Exhibit 10.2 shows four key steps in designing